Comment: Royal Mail | Carbon targets

THE City jury will be out for a while on the trading prospects for Royal Mail following the jolt from its first-quarter trading update yesterday.

Martin Flanagan

The shares are at their lowest level since the controversial privatisation last year after the group said rising competition meant that revenue in its key parcels business is likely to be lower than expected for the full year.

More people send e-mails than letters these days. As such, the Royal Mail’s parcels arm, which accounts for half the group’s turnover, has become important for fund managers judging the investment case for buying and holding shares.

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While letter post is in decline, parcels are riding the retail internet wave. But Royal Mail is facing the chill wind from the likes of TNT and Yodel, who together with other parcels gate-crashers are cherry-picking the higher margin elements.

In addition, the rug was pulled out from under the privatised group’s feet last year when online retailer Amazon moved to launch its own delivery service. As Amazon is Royal Mail’s biggest single customer, worth 6 per cent of sales, it was a shot to the body.

Taken in combination, it looks as if the division in which Royal Mail places so much hope to counter the slowburn demise of the personal letter has feet of clay.

In terms of stock market perceptions, Richard Hunter, head of equities at broker Hargreaves Lansdown, has it spot on when he says the “honeymoon period” for the group is over as investors see the competitive realities the business faces. And the problem is those realities look structural, rather than cyclical.

It is only so long that Royal Mail will be able to stave off the threat via cost-cutting. Without some sort of regulatory changing of the UK postal goalposts, the business looks vulnerable. Possible hefty fines in France also look potentially damaging because of alleged anti-competitive behaviour.

As such, you can see why some investors who decided not to “flip” the shares for a quick profit after the privatisation was so embarrassingly under-priced may feel they have missed the boat (or the post).

The shares closed yesterday down 3 per cent at 450p, having at one stage soared post-privatisation to well over six quid.

All is not gloom; Royal Mail has responded to competitive parcel pressure with a Sunday delivery service for digital shoppers and the opening of its network at weekends to receive goods from retailers.

But these look palliatives, not solutions. Until the postal trading landscape crystallises over the next 18 months or so, it would be unrealistic to expect marked gains in the share price, with “hold” or “sell” broker notices likely to be more likely than buying optimism. After the “froth” of the privatisation party comes what feels like a lingering headache.

Carbon targets and misgivings reaffirmed

THE government says it is sticking with its goal of curbing carbon emissions by 2027 to 50 per cent of 1990 levels. It is difficult not to be ambivalent about this. It provides evidence that the government is serious about its policy on greenhouse gases, and will buttress investor confidence in low-carbon technology.

But the target, with an additional target of an 80 per cent cut in emissions by the middle of this century, looked ambitious when unveiled several years ago and still does. Particularly in a climate of continuing austerity.